Who’s Gaining from the AIG Unwinds?

By Felix Salmon

March 30, 2009

Tyler Durden has a scary post up, connecting banks’ profitability in January and February to the fact that those were the months when AIG Financial Products was unwinding an enormous number of its contracts en masse. These trades, initiated by AIGFP, were allegedly enormously profitable for the biggest banks in the CDS market:

The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades – ever"…
I can only guess/extrapolate what sort of PnL this put into the major global banks… I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

If this is true, then (a) the banks still aren’t anywhere near sustainable profitability, and (b) those AIG retention bonuses — paid on the grounds that only the people who got AIG into this mess could get it out — are even more egregiously untenable than we had suspected.

The whole point of having the government take over AIG was that it wouldn’t need to enter into panicked unwinds. If it went ahead and did that anyway, the levels of competence and oversight at AIG are even lower than most of us had thought. Which is quite an achievement.